Overseas transfers – have we witnessed a mini exodus of UK citizens or are QROPS coming back into vogue? asks Daniel Bosiacki, technical consultant at AJ Bell.
HMRC’s statistics on the number and value of transfers to qualifying recognised overseas pension schemes (QROPS) during the previous tax year, released in August within Pension Schemes Newsletter 161*, were certainly an eyebrow raiser for those who take an interest in that sort of thing.
After a period between 2010/11 and 2016/17, where the annual average was almost 14,000 and the total value often comfortably more than £1 billion, the years following saw a drastic slowdown with figures across both measures slipping by almost two thirds.
That was until 2023/24. Last tax year saw 7,100 transfers processed, an increase of 115% on the 3,300 processed the year before, whilst the value of those transfers increased 67% in the same period.
Whilst these figures are still appreciably small, particularly compared with those chancellor Rachel Reeves has in mind for pooling and boosting the UK economy**, and whatever our own observations about the cause of the fluctuations may be, it is clear to see that the trend has bottomed and the bounce has commenced, for now at least.
As this is an area for technical content and not political commentary on the machinations and outputs from Westminster, we’ll stick to pension rules and focus on the impact that changes to them may have had on financial decision making.
It is important to state for those that service UK clients only that these transfers are completely within the rules. Whilst typically used by ‘expats’ that are retiring abroad and want to move their rights to a scheme closer to their new home, or those who have accrued UK rights during past periods of employment or personal saving who now wish to consolidate their arrangements somewhere suitable, transfers fall under HMRC’s ‘recognised’ definition, provided the QROPS keeps its paperwork in order by telling HMRC it is still operating with a carve out of the UK rules every five years.
When looking at why the figures have now risen there probably is only one place to start – the abolition of the lifetime allowance (LTA) charge from 6 April 2023. This meant that those members who previously couldn’t transfer without exceeding their LTA and becoming liable for tax, either because they’d crystallised benefits already under UK rules or because they have significant pension savings, were presented with a window in which they could move their pots overseas with no tax liability, provided of course they didn’t trigger the overseas tax charge (a separate charge applicable to certain transfers).
Fast-forward to April 2024 and the previous regime has exited stage left. The lifetime allowance has been replaced by new allowances and transitional arrangements for those who took benefits in a previous setting. In the context of those overseas pension transfers HMRC recognise within the UK rules, the overseas transfer allowance (OTA) has been created.
The OTA is a fixed monetary amount in the same way as the new allowances that test lump sums during life and after death. Currently set at the same level as its predecessor – the LTA – at £1,073,100 and adjusted by the standard transitional calculation where a member crystallised before its inception, the OTA allows members the right to transfer up to this amount to a QROPS anywhere in the world.
Crucially, the OTA is a standalone allowance and therefore isn’t reduced when a member takes a lump sum under the current rules, a major distinction from how the LTA operated previously (QROPS transfers being BCE8 in old money).
Implementing a new allowance that doesn’t interact with the new Relevant Benefit Crystallisation Events (RBCEs) hasn’t been completely straightforward. Those who took benefits pre-April 2024 were subject to a double counting of drawdown funds, both by the standard transitional calculation and again by the test against the OTA on the transfer, while those who took benefits before A-day weren’t catered for at all.
We are expecting new regulations to correct the double counting. Once these have been passed, hopefully by November, it may be worth revisiting any QROPS transfers your clients have made in the tax year so far, particularly if they incurred a 25% charge.
*PSN161 – Pension Schemes Newsletter 161
**Rachel Reeves policy – https://www.gov.uk/government/news/chancellor-reeves-pension-funds-can-fire-up-the-uk-economy